Everything You Need to Know About Merchant Banks

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While raising funds for the business, Corporates often look for a combination that offers financial and advisory services. Typically, the banks will have a separate arm working as a merchant bank to provide professional services and financial assistance.  

 

This blog aims to explain what is meant by merchant banking, the types of services they offer, the functions of merchant banks and a historical analysis of the interest rates offered by the merchant banks. 

Merchant Banking: Professionalising Banking Services

 

The change in customer demand, globalization, industrial growth evolution, and competitive service sectors have  led businesses to demand more personalized services. Bankers have also opened subsidiaries in merchant banks to cater to their corporate client’s financial and advisory needs.  

 

Hence, merchant banking offers professional advisory, consulting services and financial services to their clients for a reasonable consideration. In simple terms, they are intermediaries between entrepreneurs and investors. 

 

Merchant banks offer services to small enterprises that otherwise cannot raise funds. They are also international trade experts, and hence, they deal with large corporate clients to manage their financial needs, including international trade. 

 

Almost all commercial banks in India have set up their merchant banking divisions. Some of the most prominent players offering merchant banking services in India are:

 

 

Top Merchant Banks
Public Sectors  Private Sectors  Foreign Banks
SBI Capital Markets Ltd ICICI Securities Ltd Goldman Sachs (India) Securities Pvt Ltd
Punjab National Bank Axis Bank Ltd Morgan Stanely India Company Pvt Ltd
Bank of Maharashtra Bajaj Capital Ltd Barclays Securities (India) Pvt Ltd
IFCI Financial Services Ltd Tata Capital Markets Ltd Bank of America
Karur Vysya Bank Ltd Reliance Securities Ltd Deutsche Bank

 

Services Provided by Merchant Banks

 

The primary service offered by the merchant banker include consulting services, financial services and advisory services. However, with the rising competition in the merchant bank sector, they evolved over a period to provide many other services such as:

1. Portfolio Management

Merchant banks invest and trade in securities on their customer’s behalf to provide portfolio management services. 

2. Merger and Acquisition

These banks act as an intermediary and provide advisory services for mergers and acquisitions to various corporate entities and entrepreneurs. 

3. Fund Raising and Advisory Services

The preliminary activity that every merchant bank will do is raise funds for their clients. In addition to that, they deal with investors and provide skill-oriented advisory services to new entrants and established businesses. 

4. Marketing and Underwriting Services

This is one of the essential services any merchant bank provides to its client, which guarantees that if the subscription falls below the specified level, the merchant bank will come into the picture and subscribe to the amount that is falling short. 

5. Project Finance Services

Under project financing, merchant banks help businesses fill applications, provide expert advice and submit the application to raise funds from banks and financial institutions. 

6. Loan Syndication Services

Merchant banks also provide financial assistance in form of term loans to clients lacking sufficient funds to run their business. The type of loan they extend to clients is equity loans, which are different from a commercial bank’s debt loans.

 

Other Services

  • Client securities management services;
  • Investment banking related services;
  • Insurance and ancillary services;
  • Market survey and forecasting services;
  • Working capital finance services;
  • OTC (Over-the-Counter) market operations.

Activities Carried Out by a Merchant Banker

 

As of now, there are 215 merchant bankers registered with SEBI.

 

SEBI has set out a definition for a merchant bankers. As per the Securities and Exchange Board of India (Merchant Bankers) (Third Amendment) Regulations, 2006. 

 

According to this definition, merchant bankers carry out issue management activities primarily. The issue management activities could either be arranging the buying, selling or subscribing to securities, acting as a manager, providing corporate advisory services that are related to the issue management activities. 

 

The primary activities performed by a merchant banker are listed below:

  • Public issue management activities;
  • Private placement of securities relating to the issue management activities;
  • Acting as a stock broker;
  • Consulting for loan syndication;
  • Financial advisory services at both domestic and international levels;
  • Managing industrial projects for government approvals;
  • Working as a mediator to raise funds; 
  • Advisory services for business expansion and redevelopment;
  • Management of interests and dividends for clients;
  • Leasing services. 

Interest Rates and Fee

The interest rates and other charges vary from one bank to another. Moreover, the range of an interest rate charged by these banks will also be different.

 

Every merchant bank will have its area of expertise, and accordingly, they will set its charges. Here are certain examples

 

1. SBICAP Securities Ltd under SBI Capital Markets Ltd. 

 

Brokerage Charges:

 

Segment Delivery Intra-day Minimum
First Leg Second Leg
Cash Market 0.50% 0.075% 0.075% Rs. 0.05
Future 0.05% 0.03% 0.03% Rs. 0.01
Option Rs. 100 per lot Rs. 50 per lot Rs. 50 per lot
Currency Future 0.03% 0.015% 0.015%
Currency Option Rs. 30 per lot Rs. 20 per lot Rs. 20 per lot

 

Account Opening and DP Charges:

 

Service Charges
Account Opening Charges (Individual) Rs. 850 plus KRA Charges
Account Opening Charges (Non-Individual) Rs. 1000 plus KRA Charges
Account Maintenance Charges Rs. 500 (Rs. 750 for physical statement)
Additional Account Statement by courier Rs. 30
Dematerialization Request Rs. 35 per request
Dematerialization – Extra for each certificate Rs. 5
Rematerialization (per request) Rs. 35 plus Rs. 10 per 100 securities or part thereof, or a flat fee of Rs. 10 per certificate, whichever is higher

2. ICICI Securities Limited:

I-Secure Plan (Flat Brokerage Plan):

 

 

Segment Brokerage
Equity Delivery 0.55%
Equity Intraday 0.28%
Eq Margin & Margin Plus 0.05%
Eq Future & Future Plus 0.05%
Eq Future & Future Plus (Intraday) ₹50
Currency Futures 0.05%
Currency Futures (Intraday) ₹10 per lot
Options & Option Plus ₹95 per lot
Options & Option Plus (Intraday) ₹50 per lot
Currency Options ₹25 per lot
Currency Options (Intraday) ₹10 per lot
NCDs / Bonds 0.75%

 

 

Account Opening Charges:

 

 

Transaction Charges
Trading Account Opening Charges (One Time) ₹975
Trading Annual maintenance charges (AMC) ₹0
Demat Account Opening Charges (One Time) ₹0
Demat Account Annual Maintenance Charges AMC (Yearly Fee) ₹700
NRI non-UK Clients Account Opening Charges (One-time) ₹4000
NRI UK Clients Account Opening Charges (One-time) ₹6000

Closing Thoughts

 

It is essential to understand that merchant banking services are different than commercial banking services and since SEBI governs merchant banks, they usually offer consultancy services as well. They arrange financial services as a financial advisor and cater to small and large corporate firms.

 

Happy Winting!

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